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Schroders shuns UK equity income

Schroders’ multi-manager team has omitted UK equity income exposure from any of its funds because it believes the sector constrains managers to a narrow part of the market.

Schroders says it prefers to hold funds that are unconstrained and does not like the requirement for funds in the UK equity income sector to yield at least 10 per cent above the FTSE All Share index.

It says UK equity income funds are forced to bias themselves towards slower growing stocks which pay high dividends regardless of whether they are a good stock idea. Schroders says only 156 of the 688 constituents of the FTSE All Share can deliver this level of yield.

It also believes that UK equity income is inappropriate in the current climate as slowing global growth and relative valuations favour growth rather than value stocks. A characteristic of value stocks is that they tend to pay out a greater share of their earnings as dividends compared with growth stocks, which makes them attractive to UK equity income managers.

It says slower global growth driven by higher interest rates, a slowdown in the housing market and higher energy prices will benefit growth stocks as the scarcer growth becomes, the more valuable it is to investors. The valuation of growth stocks also looks relatively cheap.

Multi-manager senior portfolio manager Julian Sutton says: “By our calculation, only a quarter of stocks on the FTSE All Share index yield at least 10 per cent. We see this as an obvious constraint and not a worthy strategy at the moment.

“It worked very well between 2000 and 2003 but now the economic environment is potentially setting up companies with a better growth profile. If this is the background, value will be harder to come by.”

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